Thursday, July 09, 2009

Pharmaceutical output from US-owned firms the bright star of the Irish economy

US pharmaceutical firm Merck's principal Irish plant at Ballydine, County Tipperary

The latest Irish manufacturing data shows the contribution being made by the US-owned pharmaceutical sector.

IBEC Chief Economist David Croughan commented today on the May Irish production figures: "Although the total figures recorded only a modest decline and compared well with many other economies, which have suffered sharper falls in output, the strength came almost entirely from the 18.7% growth in pharmaceutical output.

"Output in other modern sectors such as computers, electronic and optical equipment was down by over 22%. Output in the traditional sectors fell by an annual 13.8% in the first five months of the year, with very large declines of between 30% and 46% recorded in metals and engineering, non-metallic mineral products and wood."

Service exports fell in Q1 and about 20 US firms are responsible for 70% of merchandise exports.

In the pharma/medical devices sector, about 10 US firms are responsible for 57% of exports in Q1 2009.

It’s good that we have the US firms but let’s not brag about “our great success” and dispense with questions on why we have been a failure in developing a significant indigenous sector after 50 years of FDI.

The reason why there has been a such a steep fall in the economy is that the property boom sustained so many jobs.

In the period 1998 to Dec 2007, excluding the internationally traded goods/services sector and direct construction, more than 400,000 new jobs were added.

After 2000, jobs in the internationally traded goods/services sector fell by 11,000.

The property bubble added 127,000 jobs in construction and 400,000 in the public services, indirect property supporting services, distribution and tourism.

In 2006, the peak year of the bubble, 83,000 new jobs were added. Only 6,000 were in the internationally traded goods/services sector.

Average pay in construction was €40K compared with the industrial wage of €31K and that’s not including additional allowances in construction.

During the boom, the windfalls plus lending from Irish banks, made the Irish the second biggest investors in commercial property in Europe.

Typically, €10-€15 billion went annually into commercially property while venture capital investment was generally les than €200 million annually.

As for competitiveness, the World Bank said in 2007 that Ireland was among the four most expensive countries in the world.

Anyone who travelled, would not have been surprised with that information but as regards the issue of competitiveness, the dominant US -owned sectors and the indigenous sectors should not be lumped together.

Last month's IMF report on Ireland, does refer to the fall in our share of FDI in recent years, in contrast with the superlatives from the IDA but there are many more issues at play than local costs.

During the boom, apart from Ryanair, there was no big local export success and the hopes in the late 90’s for the high-tech sector were not realised.

So indigenous exports are still mainly concentrated in traditional sectors and dependent on the traditional market, the UK.

The best potential market sector for Irish firms is the Eurozone and if food producers have trouble selling to Tesco at home, it would not be easy elsewhere.

According to the ECB, Irish unit labour costs rose by 33% in the period 1999-2007, compared with Germany’s 3% and Finland’s 11%. Of course new product development and so on are are also relevant but if prices are out of line, the task of breaking into a new market is not an easy one.

Irish Economy: Home Truths on Irish Exports as Ireland faces a changed global economy in the decade ahead